Hurricane Otis: the end of LatAm’s nat cat calm

Re/insurers in the region saw their four-year nat cat hiatus shattered in October, just as political turbulence looms—with 2024 marked out as a year of elections, says AM Best.

Latin America enjoyed a relative absence of major catastrophic events over the past four years, but that was shattered by category 5 Hurricane Otis, which made landfall close to Acapulco, in Mexico, in October 2023.

Otis intensified very quickly, bringing devastation to the area with 165 mph winds, flooding and mudslides.

Before the shock of Otis, there was in LatAm a calm period that had allowed reinsurers some breathing space to regroup.

“This lack of major catastrophic events in the region enabled reinsurers to take advantage of the hardening conditions of the global reinsurance market and be more profitable,” explains Alfonso Novelo, senior director LatAm at AM Best, based in Mexico City.

AM Best’s general view for LatAm region reinsurers is that they have extremely strong capital positions, he adds, which have allowed them to boost their balance sheet strength.

Novelo says that a number of countries in Latin America have kinds of equalisation reserves, which in certain jurisdictions are defined as catastrophic provisions. “That pulls the capital position of a company and to some extent provides them with the flexibility and the opportunity to take advantage of a fiscal shield.”

Primary insurers are the main beneficiaries of these equalisation reserves as, Novelo says, most reinsurers are not eligible, although Patria Re in Mexico has taken advantage of it, he adds.

“But the positive trend in terms of catastrophic events was broken by events in Acapulco, which has definitely had an impact on a lot of players that were participating in the Mexican market.”

Elí Sánchez Escobedo, associate director at AM Best, also based in Mexico, added that while there had been no cat events in LatAm until Acapulco, cat events in the rest of the world had affected global reinsurers that participate in the region.

“In that sense, global reinsurers were quite conservative in giving more capacities to the Latin American market or providing reinsurance to regional reinsurers, so we saw that effect.

“However, we saw more appetite from the regional reinsurers to take on those risks and from insurers thinking of other solutions that were more economical to them, given that a lot of the global insurers were sceptical and more aware of the potential of natural catastrophes here in the region.”

Mitigating political risk

The significance of political risk is a developing topic for the Latin America re/insurance market, with some referring to 2024 as “a year of elections”, suggesting societal changes and potential upheaval. Such risk is of most significance to reinsurers domiciled in the region, but these businesses are taking measures to mitigate it.

Sánchez Escobedo agrees that there is some significant political risk, and says: “Some reinsurers domiciled in Latin America have started to build reinsurance companies in safer places, let’s say North Carolina in the US, or maybe they are interested in opening an office or insurance company in London.”

“Regionally domiciled reinsurers want be more capital-efficient.” Elí Sánchez Escobedo, AM Best

He says that such strategies are helping reinsurers prepare for any potential major problems in their countries. It matters because political violence (PV) or strike, riot and civil commotion (SRCC) would “look bad” for many capital models and credit ratings, he explains, which in turn would mean increased charges on capital requirements to deal with those risks.

“Regionally domiciled reinsurers want be more capital-efficient, in case political risk increases in any of those countries,” he adds.

Commenting on the potential for PV and SRCC in LatAm, he adds: “For most re/insurers, it’s not something that is going to happen for sure but they have an instrument they can migrate to if need be.”

Political change can bring positive change, says Sánchez Escobedo, pointing to the ongoing developments in regulation.

“Political decisions have opened the market, especially in countries such as Ecuador. Some business lines there that had been a bit limited to reinsurers are now open to them, especially individual auto and life.”

However, other markets such as Chile, have a number of exclusions on riots in some of the policies, says Novelo. Sánchez Escobedo agrees, saying that in Chile in 2018/19 there were riots, which might have been expected to affect the insurers but didn’t because most of it was excluded.

The grass isn’t always greener

Moving into other countries doesn’t always work out for the best, says Novelo, citing the example of some regional reinsurers that do business in Brazil. He explains that these businesses wanted to diversify into other countries even though Brazil is the largest economy in Latin America.

“Brazil doesn’t face a lot of catastrophic exposures such as hurricanes, although you do have to worry about floods and droughts. It’s a very interesting economy, but a lot of these re/insurance players were looking for additional revenue from other countries.

“You could say they were not lucky enough or that they didn’t look sufficiently into the risk they were underwriting. They had bad results because of this expansion. So now in the Brazilian market companies are taking a second look into those risks.

“I don’t want to say that this is a general trend in the market, because expansion has worked for a few parties that made money with diversification. But a number of other companies did poorly and they are reducing those exposures and going back to their core business.”

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